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September 05, 2002
Attn: Romunda Price
Re: Ethics Standards for Neutral Arbitrators in Contractual Arbitration; Response to Invitation to Comment
Dear Ms. Price:
National Futures Association (NFA) appreciates this opportunity to comment on the Ethics Standards for Neutral Arbitrators in Contractual Arbitration. We agree with most of the provisions in the Ethics Standards, and we commend the Council for its hard work and thoughtful deliberation. We do, however, believe that some of the provisions go farther than necessary to ensure neutrality, and we are concerned that those provisions may have a negative impact on NFA's ability to provide a cost-effective, nation-wide arbitration forum for customer complaints.1
NFA is a federally-authorized self-regulatory organization (SRO) for the futures industry. One of NFA's responsibilities under the federal Commodity Exchange Act (CEA) is to provide an arbitration forum for disputes between customers and NFA Members. In particular, Section 17(b)(10) of the CEA requires NFA to provide customers with fair and equitable dispute resolution procedures for claims between customers and NFA Members.2 Furthermore, NFA's arbitration program is regulated by the federal Commodity Futures Trading Commission (CFTC). CFTC Regulation 170.8 requires NFA's arbitration rules to be consistent with the guidelines and acceptable practices for dispute resolution found in Appendix A and Appendix B to Part 38 of the CFTC's regulations.3 Those guidelines and acceptable practices require NFA to provide customers with fair and equitable dispute resolution procedures that include the right to an objective and impartial decision-maker. The CFTC approves NFA's arbitration rules and audits NFA's arbitration program to ensure that the program meets these requirements.
All customer cases filed at NFA involve exchange-traded futures transactions, which Section 3(a) of the CEA4 declares to be transactions in interstate commerce. In fact, these transactions are specifically preempted from state regulation by Section 2(a)(1)(A) of the CEA.5 Therefore, all NFA customer arbitration proceedings are governed by the Federal Arbitration Act, and NFA could avoid the application of the Ethics Standards altogether simply by moving these cases out of California.6 We do not, however, believe that solution is fair to the customers our forum is designed to serve. For that reason, we are continuing to select arbitrators for hearings in California and are complying with the Ethics Standards while doing so.
On the other hand, NFA is concerned that certain provisions of the Ethics Standards may make it difficult to find qualified arbitrators for these California cases, especially when a customer requests a Member panel with futures industry knowledge and experience. In this worse-case scenario, we will have little choice but to move those cases out of California. Furthermore, since all of the disclosure requirements under the Ethics Standards are automatic disqualifications if a party objects, we are concerned that a less conscientious NFA Member may object for the sole purpose of delaying the proceedings or moving the hearing out of the customer's back yard.
NFA understands that the Judicial Council may not adopt standards that are less stringent than those described in §§ 170.1 and 1281.9 of the California Code of Civil Procedure. We fully agree that neutral arbitrators should not serve if they have a strong incentive to be partial; that they should disclose all circumstances that may create a reasonable appearance of partiality; and that they should be disqualified based on a party's objection if the disclosure does, in fact, create a reasonable appearance of partiality. Unfortunately, because of the interplay between California Code of Civil Procedure §§ 1281.9, 1281.91, and 1286.2(a)(6), a required disclosure becomes an automatic disqualification if a party objects to the arbitrator, even if the facts are such that a reasonable person would not entertain any doubt about the arbitrator's impartiality. Therefore, the Ethics Standards should be careful not to extend their reach too far.
NFA fully supports Standards 5, 6, 7(b)(14), 7(c), and 11, 12, 13, and 14(a). These are common sense standards that should apply to all neutral arbitrators, regardless of the source of the appointment.
For the most part, the disclosure requirements under Standard 7(b) are similar to the standards that NFA applies to its arbitration proceedings. In fact, NFA asks its arbitrators to disclose this information before NFA makes the appointment, and many of the disclosures required by Standard 7(b) are treated as automatic disqualifications that keep NFA from appointing the arbitrator to that case in the first place, even when our experience with the arbitrator leads us to believe that the arbitrator would be scrupulously neutral.
As these relationships become more attenuated, however, the likelihood that they will result in partiality decreases. For these more attenuated relationships, NFA appoints the arbitrator subject to challenges for cause and discloses the relationship. Depending on how attenuated the relationship is, however, NFA may or may not honor the objection and remove the arbitrator. Arbitration fora such as NFA should continue to have the ability to evaluate the facts that have been disclosed and determine if they create a reasonable impression of partiality and, therefore, create a valid objection for cause.
NFA is concerned that some of the provisions of Standard 7(b) are too complex and place too high a burden on an arbitrator. NFA arbitrators are volunteers. Although NFA does pay its arbitrators an honorarium, that honorarium is a drop in the bucket for most of them. NFA only pays arbitrators for the time they actually spend hearing the matter, which means that arbitrators are not compensated for time spent reviewing pleadings and deciding motions, among other things. Furthermore, NFA's highest rate is $475 per hearing day for the chairperson of a panel. This means that many arbitrators actually lose money serving for NFA since they cannot charge their normal hourly rate. In other words, few NFA arbitrators have a monetary incentive to go through the time and effort to understand the more complex aspects of the Ethics Standards and do the more extensive searches they require. Therefore, we are concerned that the Ethics Standards could discourage qualified arbitrators from serving. Our specific comments regarding these requirements follow.
NFA would automatically disqualify the arbitrator if the arbitrator or a member of the arbitrator's immediate family met the requirements of Standards 7(b)(1) and, except in rare circumstances, would also disqualify the arbitrator if a member of the arbitrator's extended family met those requirements. We also understand that this requirement is substantially the same as § 170.1((a)(4) of the Code of Civil Procedure. Therefore, we concur with this standard.
NFA also concurs with most of the provisions in Standard 7(b)(2). In particular, we agree that an arbitrator should not have a family relationship with a lawyer in the arbitration. We also recognize that § 170.1(a)(5) of the Code of Civil Procedure, interacting with § 1281.9(a)(1), requires arbitrators to disclose when certain family members are affiliated with the same law firm as a lawyer in the arbitration. However, Standard 7(b)(2) extends this requirement beyond the relationships described in § 170.1(a)(5). We do not believe that an arbitrator should necessarily have to disclose that a member of its extended family (e.g., an aunt, uncle, niece, or nephew) is employed by the same law firm as an attorney in the arbitration, particularly where the arbitrator and his or her relative do not have a close relationship and rarely see or talk to each other. Therefore, NFA recommends that Standard 7(b)(2)(C) be limited to the family members listed in § 170.1(a)(5) and any members of the arbitrator's extended family who live in the same household as the arbitrator. Obviously, if the arbitrator had a close relationship with the relative, the arbitrator would be required to disclose the association between that relative and the lawyer in the arbitration under Standard 7(b)(14) or, in some circumstances, to decline to serve under Standard 6.
Similarly, NFA would automatically disqualify an arbitrator if the arbitrator or a member of the arbitrator's immediate family currently has a significant personal relationship with a party or an attorney in the arbitration. We recommend, however, that Standard 7(b)(3) be limited to current relationships or relationships within the relatively recent past (e.g., two years) and not extend beyond the parties and the lawyers in the arbitration. For example, a close friendship between the arbitrator and a member of an attorney's law firm that ended ten years ago will not normally create a current incentive for the arbitrator to rule for or against that firm's client. If there are particular circumstances that make it hard for the arbitrator to be impartial, Standard 7(b)(14) would require the arbitrator to at least disclose those circumstances, and Standard 6 may well require the arbitrator to refuse the appointment.
The disclosures required by Standard 7(b)(5) are not specifically required by the Code of Civil Procedure and could be burdensome. We realize that there may be some value in disclosing the existence of other dispute resolution proceedings in which the arbitrator served as a mediator, a temporary judge or referee, or otherwise provided dispute resolution services to a party or lawyer in the arbitration or to a lawyer's firm. However, we believe that the burdens on the arbitrator to track down information on his or her compensation outweigh the benefits. This is also true for proceedings where a lawyer's firm affiliation was not evident.
Standard 7(b)(6) mostly tracks the requirements in § 1281.9(a)(5) and § 170.1(a)(2) of the Code of Civil Procedure. The professional relationships enumerated in Standard 7(b)(7) are all relationships that must be disclosed to NFA. In general, NFA treats these relationships as automatic disqualifications if they are current relationships and as disqualifications for cause (upon objection) if they occurred within the recent past (varying from one to five years, depending on the relationship). NFA treats the matters in Standards 7(b)(8), (9), (10), and (11) as automatic disqualifications.7 Although NFA does not require its arbitrators to make the disclosures listed in Standard 7(b)(13), it is a reasonable standard to apply. Therefore, NFA agrees with all of these standards.
NFA proceedings are not "consumer arbitrations" as defined in the Ethics Standards since NFA Members may not legally require customers who qualify as consumers to sign a predispute arbitration agreement (PDA) on a "take-it-or-leave-it" basis. CFTC Regulation 166.5(c)(1) specifically prohibits those categories of registrants that belong to NFA from requiring a customer to sign a PDA as a condition of doing business with that registrant.8 Therefore, Standard 7(b)(12) does not apply to NFA arbitration proceedings. Nonetheless, we believe that disclosing this information could be extremely burdensome for arbitrators serving at other national arbitration fora, and we urge the Judicial Council to reconsider section 12 in its entirety.
Standard 7(d)(1) provides a reasonable test for meeting an arbitrator's obligation regarding extended family relationships. However, we question the effectiveness of requiring the arbitrator to confirm in writing that he or she has sought and disclosed the information. We are concerned that this requirement will impose an additional burden on the arbitrator without providing a corresponding benefit to the parties to the arbitration.
With regard to Standard 7(e), we certainly agree that an arbitrator has a continuing obligation to disclose any information that comes to the arbitrator's attention and should not be allowed to avoid that obligation by intentionally burying his or her head in the sand. We also believe that arbitrators should conduct periodic checks to discover any new disclosable information. Therefore, we concur with this requirement. On the other hand, the Judicial Council should clarify that the arbitrator's obligation to inform himself or herself of disclosable matters only requires that checks be done at reasonable intervals or before major events in the arbitration process.
Standard 10(b) requires an arbitrator to affirmatively state that the arbitrator either will or will not accept otherwise allowable employment (e.g., as an arbitrator or mediator) from a party, a party's attorney, or the attorney's law firm while the arbitration is pending. We believe that this standard should be revised to state that the arbitrator must disclose this information if the arbitrator will accept employment and may not accept employment unless the disclosure was made. We are concerned that a losing party could try to get an award vacated based on the simple fact that an arbitrator forgot to address the issue, even though the arbitrator did not accept any additional employment and would not have done so if asked.
Finally, we request clarification regarding Standard 15(a). NFA does not represent or imply favoritism or a specific outcome for any particular arbitration case. We do, however, market our program as a customer-friendly forum. In particular, we mention several procedures specifically designed to make the forum more attractive to customers (e.g., the customer has a choice between a Member or a non-Member panel, and the hearing is usually held in a location of the customer's choice). We also cite statistics that show that customers win approximately 60% of the time and, when they win, they recover an average of 60% of the amount requested. We believe that this truthful information assists customers in making an informed decision regarding whether to use our forum. Therefore, we would like clarification that this type of marketing would not violate Standard 15(a).
If you have any questions or need any additional information, please contact me. My telephone number is 312-781-1393 and my e-mail address is email@example.com. You can also find more information about NFA and its arbitration program on NFA's web site at www.nfa.futures.org.
Very truly yours,
Kathryn Page Camp
1Most, although not all, of the customers who file claims at NFA would qualify as consumer parties under the Ethics Standards.
27 U.S.C. § 21(b)(10).
317 C.F. R. § 170.8. See also Appendices A and B to 17 C.F.R. § 38.1, et seq.
47 U.S.C. § 5(a).
57 U.S.C. § 2(a)(1)(A).
6The only qualifications to be an NFA arbitrator are integrity, impartiality, and sound judgment. Nonetheless, we do provide customers with the option of choosing either a "non-Member" panel, where the single arbitrator or the majority of a three-person panel, including the chairperson, is not connected with an NFA Member, or a "Member" panel, which is expected to have industry knowledge, and customers choose Member panels more than half the time. Since the futures industry is relatively small in terms of the number of people involved, it can be nearly impossible to find an arbitrator with futures experience and expertise that does not have at least one of the more attenuated relationships covered by the Ethics Standards.
7 In rare instances, NFA may decide not to disqualify an arbitrator if the financial interest in the party is insubstantial or remote as, for example, if an arbitrator owns a small number of shares in a public company that is a party to a proceeding and the shares constitute a very small percentage of the arbitrator's financial holdings and income. Although NFA would normally disqualify this arbitrator if an objection were raised, NFA may exercise its judgment to retain the arbitrator if the arbitrator cannot be easily replaced without delaying the hearing or changing the hearing location. NFA recognizes, however, that § 170.1(a)(3) appears to include even these more insubstantial interests. Therefore, NFA concurs with Standard 7(b)(8).
817 C.F.R. § 166.5(c)(1). Although there is an exception for PDAs with eligible contract participants, these customers will not generally qualify as consumers since most of them are institutional customers. Individuals cannot be eligible contract participants unless they have at least $10,000,000 in assets (or $5,000,000 if the individual is using futures contracts to manage the risk associated with his or her assets or liabilities).